The post-tax profits of a limited company can be distributed to its shareholders in the form of dividends.
This short article explains how dividends are administered, and how dividends are taxed.
To work out the total amount of dividends that can be distributed to company shareholders, you need to subtract the value of all company expenses from your turnover.
You then apply the current corporation tax rate to this post-expenses amount (the small companies’ tax rate is currently 20%). The remaining sum can be distributed as dividends to shareholders. You must distribute the funds in line with the percentage shareholding each shareholder owns.
If you have retained profits brought forward from previous accounting periods, these can also be distributed as dividends.
In order to comply with the rules which govern limited companies, you are required to prepare company board meeting minutes each time you declare a dividend.
If you are unsure how these minutes should be recorded, check with your accountant – it’s a simple process.
For each dividend declaration, each shareholder must receive a dividend voucher which sates the total net dividend paid, and the amount of the 10% tax credit which is applied to all UK company dividends.
There are no rules governing how frequently you can distribute dividends, although many larger companies do so on a quarterly basis. It may suit you to distribute dividends to coincide with you VAT quarter, (if you are registered) or you may prefer monthly dividends for cashflow reasons.
However, you can only distribute dividends if you have made allowances for your tax liabilities. You must never distribute funds if you have not allowed for tax.
You may well have further income tax to pay on any dividends you receive as a company shareholder. We cover this topic in our article company dividends – how much tax to pay?